As a franchisor, it is critical to consider the best franchise business structure. Franchising allows for business growth and expansion by entrusting daily operations to your franchisees. When franchisors like yourself establish a new location, it is necessary to choose an operational structure carefully. Therefore, a thorough understanding of various models and their long-term impacts is essential. This article outlines the different franchise models to assist you in making an informed decision to ensure business success.
1. Single Company Structure
In a single company structure, you will establish your business as a proprietary limited company. This structure typically has at least one shareholder and is limited in how it raises funding from the public.
A single company structure offers the advantage of being a separate legal entity capable of owning its assets and liabilities.
However, the disadvantage lies in the potential loss of valuable assets and intellectual property for your franchisees if anything goes wrong. Therefore, you must ensure that their business and personal assets are kept separate. This will safeguard personal assets. Otherwise, your franchisees will personally suffer.
As a franchisor, you will typically license intellectual property and own trademarks. As such, the failure of any franchisee businesses directly affects you as these would be lost. Conversely, being a branch of a parent company means you could incur certain losses if any issues arise.
2. Two-Tiered Company Structure
A two-tiered company structure involves a holding company and an operating company. A holding company owns all the assets that operating companies use. An operating company is a subsidiary company that manages the day-to-day operations of the business. If the operating company is sued, the overall company assets will remain protected. This is because the holding company will safeguard the assets. While this model minimises risk, it can be costly to set up due to the requirement of funding two separate companies.
For franchisees, such as yourself, this structure may be unnecessary, as the franchisor-franchisee relationship already resembles this. In this case, you would be considered the holding company since you own all the assets.
Continue reading this article below the form3. Franchise Trust Structure
A trust establishes a relationship between the trustee and beneficiaries. The trustee is obliged to hold the business for the beneficiary’s benefit. The legal ownership of the business rests with the trustee, who can take the form of either an individual or a company. Importantly, it is crucial to note that the trustee is distinct from the franchisor.
There are two types of trusts:
A discretionary trust provides the trustee with the discretion to determine which beneficiaries are to receive the trust’s assets. A unit trust does not award the trustee this ability. Instead, beneficiaries own set amounts of units and will receive a set amount based on the units they own.
In this model, the trustee is the legal entity. Therefore, trusts can award your tax and asset protection. Your franchisees have less personal income tax to pay due to distributing their profits to beneficiaries. However, this distribution means that those beneficiaries’ income would be taxed.
There are high expenses in setting up a trust. For the tax benefits of trusts, your franchisees must distribute these assets. This may be an issue if they want to attract capital or investment, as it can look like they have no assets.
As a franchisor, there is limited impact on you if your franchisees adopt a franchise trust structure approach. However, it is a costly structure and will depend on the franchisee’s future business plans. It is also contingent on how much capital your franchisees need to operate and how long they plan on running the franchise.
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Key Takeaways
Every franchise your franchisees operate demands a specific business structure. The potential impact on you becomes evident when issues arise within their businesses, particularly in a single company structure. However, some structures may not affect you directly. Therefore, staying informed about the repercussions of each business structure is essential to ensure the overall success of your franchise network.
If you need assistance understanding your liability requirements, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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